Tuesday, September 20, 2011

Canadian Income/Personal Debt Index is higher in Canada than the U.S – Really


  
Are we comparing apple and oranges here?  First off, we are comparing Personal disposable income.  While my American cousins’ harp about the fact that health care in Canada is not free, it is free as a portion of personal disposable income in Canada.  Whereas in America the average American spends nearly 20% of his disposable income on medical costs (I wish I was exaggerating – the math don’t lie!).

So the table that is often show that Canada has now passed its over indebted cousins would seem to compare to things that are not comparable.  So taking healthcare allocated revenues out of Americans disposable income reduces that index by 12%.  Which means that Canadian are not yet the worse of the lot… although we are working hard at changing this, as the direction of debt growth is for ever up while Americans are aggressively (willingly or otherwise) deleveraging.


The above graph shows the trend, and while Canada is “really” not as bad as the U.S. TODAY, the direction of both market is somewhat (huge sarcasm here) evident.  Canadians continue to borrow at unprecedented rate while the Americans are not (in fact the problems in America are becoming very severe with the destruction of credit facilities everywhere – shadow banking is in free fall). 

Bonus:  A friend recently relocated to Phoenix (big job and big salary) found a very nice house (actually a spectacular house for a very reasonable amount of cash) sought mortgages (non-conforming) from three lenders (well recognized financial institutions), the higher was for 71% LTV – not a problem for my friend, but the terms were far from interesting.  Eventually he picked a 50% mortgage – yes he invested 50% in cash.  No wonder the U.S. housing market cannot find its footing, if the minimum cash amount now required is 1/3rd of the purchase price (probably a good idea).  This to illustrate the dilemma facing the Federal Reserve tomorrow – at the very least “operation twist” is on, but they may have to do more.  Investors have lost all confidence in the system, and have chosen to protect capital instead if seeking return. 

Bonus 2: Yesterday, China “announced” that they were supporting Europe… yet at the same time Chinese banks are cutting European bank lines (BTW I totally agree with the Chinese banks position – this has been a constant refrain in North American financial institutions – the game is up in Europe, why stick around to pick up the pieces).  One thing that bankers have learned is you may be protected by your ISDA agreement if your counterparty fails, but it's September 2011 and my employer is still dealing with the Lehman legacy, we are still waiting for some of our collateral… 

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